Blackbox banks

Some four years after the crisis, big banks’ shares remain depressed. Even after a run-up in the price of bank stocks this fall, many remain below “book value,” which means that the banks are worth less than the stated value of the assets on their books. This indicates that investors don’t believe the stated value, or don’t believe the banks will be profitable in the future—or both. Several financial executives told us that they see the large banks as “complete black boxes,” and have no interest in investing in their stocks. A chief executive of one of the nation’s largest financial institutions told us that he regularly hears from investors that the banks are “uninvestable,” a Wall Street neologism for “untouchable.”

That’s an increasingly widespread view among the most sophisticated leaders in investing circles. Paul Singer, who runs the influential investment fund Elliott Associates, wrote to his partners this summer, “There is no major financial institution today whose financial statements provide a meaningful clue” about its risks. Arthur Levitt, the former chairman of the SEC, lamented to us in November that none of the post-2008 remedies has “significantly diminished the likelihood of financial crises.” In a recent conversation, a prominent former regulator expressed concerns about the hidden risks that banks might still be carrying, comparing the big banks to Enron.

The only justifiable reason to worry about the banks because there isn’t effective regulatory oversight. We all know what the situation is: in very round numbers, 10 million people were unexpectedly unable to pay their mortgages with a face value somewhere above $1T. A similar, though lesser, situation obtained for businesses. The actual losses those represented were much smaller, since (as long as it is maintained) a house remains an asset even if it is vacant. The true losses are the mortgage payments. Those might represent $100B/year, as long as the home or commercial property remains vacant. Those true losses have to be accounted for through reduced bank profits or taxpayer assistance. In what amounts to profitable banks (especially past profits) propping up banks through the Federal Reserve giving sweetheart loans, we are gradually working through the inventory of vacant homes, the losses to the banking system are falling, and things are getting back to normal.

Unless they are not. The problem is that, while we know that mortgage lending standards have improved, there isn’t much to keep them from going off the rails again. And certainly as long as the banks keep their books secret and their practices immune from regulatory oversight, investors will want exceptional assurances from them. Who wants to buy a pig in a poke?

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This entry was posted on January 3, 2013 at 2:01 pm and is filed under banking, financial crisis.
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